Darden Restaurants Inc. said Thursday that it would sell or spin off its Red Lobster chain, which along with Olive Garden has been a drag on profits.
Orlando, Fla.-based Darden said it also would suspend the opening of new Olive Garden locations and limit new LongHorn Steakhouse restaurants.
Clarence Otis, Darden’s chairman and chief executive, acknowledged that the casual-dining segment was under pressure. He said the segment had experienced “relatively low levels of consumer demand in each of the past several years” and “additional unexpected softness since June.”
Activist investor Barington Capital Group, which holds about 2 percent of Darden’s shares, has been pressing Darden to split into two companies. The shareholder had called for one company to own and operate the mature Olive Garden and Red Lobster brands and another to manage the growing LongHorn Steakhouse, Bahama Breeze, Capital Grille, Eddie V’s, Seasons 52 and Yard House concepts. Darden’s plan keeps Olive Garden in the Darden fold.
Barington said a split could push Darden’s stock to between $71 and $80. Darden shares fell about 6.4 percent, to $49.53, in late morning trading Thursday.
The company has targeted the spinoff or sale of Red Lobster to be completed early in its fiscal 2015, which starts on May 26, 2014.
The move, Otis said, “will better enable the management teams of each company to focus their exclusive attention on their distinct value creation opportunities."
To accommodate the separation of Red Lobster, Darden also announced management changes. Kim Lopdrup, who now heads the Specialty Restaurant Group, will become chief executive of Red Lobster. He served as president of Red Lobster from 2004 to 2011.
Brad Richmond, now chief financial officer for Darden, will move to become CFO at Red Lobster, and the company will seek a new CFO to succeed him. Harald Herrmann, president of Yard House, will become president of the Specialty Restaurant Group in January.
Red Lobster has 705 restaurants in the United States and Canada and had fiscal 2013 sales of about $2.6 billion, but it has struggled amid a prolonged casual-dining downturn. The company said same-store sales for the brand fell 4.5 percent in September, 4.3 percent in October and 4.6 percent in November.
For the Nov. 24-ended second quarter, Darden reported a 41.1-percent decline in profit, to $19.6 million, or 15 cents per share, from $33.6 million, or 26 cents per share, in the prior-year period. Revenue rose 4.6 percent, to $2.05 billion from $1.96 billion in the same period last year.
Analysts weigh in
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Stephen Anderson, an analyst with Miller Tabak & Co., said a sale of Red Lobster could bring in “somewhere between $2.0 billion and $2.5 billion.”
David E. Tarantino, analyst with Robert W. Baird & Co., said he was encouraged by Darden’s “plan to separate the struggling Red Lobster brand from the rest of the business, but we remain concerned about the weakness in the core operating fundamentals of the overall business.”
Tarantino said Red Lobster makes up about 30 percent of Darden’s annual sales. However, he added that the company said the brand’s strategies “no longer align” with those of the other concepts in its portfolio.
“As such, the separation of this brand will lead to greater focus on improving operations for both Red Lobster and Darden excluding Red Lobster,” he said.
“The company believes that Darden excluding Red Lobster will be able to achieve higher and more consistent comps, new unit growth and earnings growth, while generating healthy free cash flow that can be returned to shareholders through dividends and buybacks,” Tarantino added.
Darden also said its reduced growth plans will lower capital spending for the company by at least $100 million a year, and additional cost savings of $10 million a year will be added to its previously announced target of $50 million in savings, which included administrative staff reductions announced earlier this fall.
The planned tax-free spin-off of Red Lobster will require approval from Darden’s board. It does not require a shareholder vote. Darden has hired Goldman Sachs & Co. as its financial advisor and Latham & Watkins as its legal counsel in connection with the spin-off.
Darden owns and operates 2,174 casual-dining restaurants, including 705 Red Lobster units, 834 Olive Garden locations, 445 LongHorn Steakhouse outlets, 52 Capital Grille restaurants, 48 Yard House restaurants, 36 Bahama Breeze locations, 35 Seasons 52 units and 13 Eddie V’s restaurants.
This story has been revised to reflect the following correction: